(Fiscal) Cliffs Notes

The most bizarre thing about the deficit and the campaign is the fact that the risk of a fiscal cliff—which everyone agrees will crash the economy—is being used to justify a slightly smaller fiscal cliff. There are several players here, so the arguments are worth sorting out. Herewith, some Cliffs Notes:

What is the fiscal cliff?

It comes in three parts. On January 1, the Bush tax cuts expire. This means that in the first pay period of the new year, more taxes are taken out of everyone’s withholding. Second, the temporary two-point cuts in payroll taxes expire too, so everyone’s Social Security and Medicare taxes go up as well. Third, the dreaded “sequester” of automatic budget cuts, the toxic fruit of the Republican blockade of a normal budget deal back in 2011, kick in. Oh, and extended unemployment benefits expire, too.

What would all this fiscal tightening do to the recovery?

It would create a new recession, according to the Congressional Budget Office (CBO), Fed Chairman Ben Bernanke, and every sane economist who has studied it. We’re talking about $607 billion of fiscal contraction in one year—shades of Chancellor Merkel’s demands on Greece. The CBO says that will cause the economy to shrink by 1.3 percent in the first half of 2013—a double dip recession.

CBO even calculates that the debt burden will increase rather than decrease later in the decade, because of the shrunken economy.

If everyone fears the fiscal cliff, how does it play into the hands of the right?

Two ways. The budget-balance right—Erskine Bowles, Alan Simpson, Pete Peterson, the corporate-funded campaign to Fix the Debt—are using the fiscal cliff as a pretext to argue for a slightly smaller cliff of budget increases and tax hikes. This makes no sense. If a big cliff is insane economics, a medium-sized cliff isn’t much better.

What about the Romney-Ryan right?

The Romney campaign worsens the threat of the cliff by calling for a 20-percent, across-the-board tax cut worth $5 trillion. Romney says that this would not increase the deficit because he’d close an equal amount of loopholes. This is, in Joe Biden’s word, malarkey. There aren’t enough loopholes, unless you want to go after the charitable deduction or the mortgage-interest deduction, which Romney says he won’t do. The right refuses to entertain any tax increases, even on the wealthy, which ups the ante on the Democrats to do it all with program cuts including in Social Security and Medicare. That also drives a wedge between Obama and the Democratic base.

So who holds the best cards here, Romney-Ryan or Bowles-Simpson?

Barack Obama does, if he has the nerve to play them well.

How is that?

First, the Republicans are denying the bottom 98 percent tax relief—this is Obama’s position—because they are holding it hostage for continuing the Bush tax cuts on the top 2 percent. By keeping that difference front and center, Obama can remind voters that the Republican loyalty is to the very wealthy at the expense of the middle class. The default is that everyone’s taxes go up, because the Bush tax cuts expire unless Congress. That fact alone gives Obama the whip hand.

What else?

On the rest of the fiscal cliff, two can play hardball. The Republicans are terrified of the military parts of the sequester. Despite the somewhat misleading metaphor of a “cliff,” this is not a one-time jump, but rather a downward slope—more like a fiscal beach. If Obama hangs tough and lets some of the cuts start biting, the Republicans may actually start negotiating.